U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

      [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                      For the Quarter ended March 31, 2005

                                       OR

      [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

             For the transition period from__________ to __________

                         Commission file number 1-11568

                                  DYNTEK, INC.
             (Exact Name of Registrant as Specified in its Charter)

         Delaware                                               95-4228470
         --------                                               ----------
(State or other jurisdiction of                               (I.R.S Employer
 incorporation or organization)                              Identification No.)

                        18881 Von Karman Ave., Suite 250
                                Irvine, CA 92612
               (Address of principal executive offices) (Zip code)

        Registrant's telephone number, including area code (949) 955-0078

      Indicate by check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days. Yes X No ___

      Indicate by check whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes___ No X

      As of May 11, 2005, the number of shares outstanding of the registrant's
Common Stock, $.0001 par value, was 75,426,765.


<PAGE>

                          DYNTEK, INC. AND SUBSIDIARIES

                                      INDEX

PART I - FINANCIAL INFORMATION                                             Page
                                                                          Number
                                                                          ------

Item 1.  Condensed Consolidated Financial Statements

     Condensed Consolidated Balance Sheets - as of March 31, 2005         3
         (unaudited) and June 30, 2004

     Condensed Consolidated Statements of Operations and Comprehensive    4
         Income (Loss) (unaudited) - For the Three and Nine Months
         Ended March 31, 2005 and March 31, 2004

     Condensed Consolidated Statements of Cash Flows (unaudited)          5 - 6
         - For the Nine Months Ended March 31, 2005 and
         March 31, 2004

     Notes to Condensed Consolidated Financial Statements (unaudited)     7 - 22

Item 2. Management's Discussion and Analysis of Financial                 23-33
         Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk        33
Item 4. Controls and Procedures                                           33

PART II - OTHER INFORMATION

Item 1. Legal Proceedings                                                 34
Item 6. Exhibits                                                          35

SIGNATURE                                                                 36


<PAGE>

PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                          DYNTEK, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                         ASSETS                                              March 31, 2005           June 30, 2004
                                         ------                                              --------------           -------------
CURRENT ASSETS:                                                                                 (unaudited)
<S>                                                                                               <C>                     <C>
      Cash                                                                                        $     828               $   2,810
      Cash - Restricted                                                                                 417                     479
      Accounts receivable, net of allowance for doubtful accounts of $260
      and $240 at June 30, 2004                                                                      15,711                  12,045
      Inventories                                                                                       977                   1,255
      Prepaid expenses and other assets                                                                 120                      54
      Other receivables                                                                                  23                      88
                                                                                                  ---------               ---------
               TOTAL CURRENT ASSETS                                                                  18,076                  16,731
               --------------------

RESTRICTED CASH - over one year                                                                          86                      91

INVESTMENTS - Marketable Securities                                                                      51                      78

INVESTMENTS - Preferred Stock                                                                           500                   1,104

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $3,157 and $3,035                          1,629                     663

GOODWILL                                                                                             23,101                  19,869

CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $734 and $652                             81                     163

ACQUIRED CUSTOMER LIST, net of accumulated amortization of $9,183 and $7,136                          5,336                   5,542

PURCHASED SOFTWARE, net of accumulated amortization of $690 and $671                                     --                      19

DEFERRED FINANCING COSTS, net of accumulated amortization of $357 and $77                             1,124                     655

NOTES RECEIVABLE, long term, including receivable from officer of $100                                  300                     548

DEPOSITS AND OTHER ASSETS                                                                               534                     186
                                                                                                  ---------               ---------
      TOTAL ASSETS                                                                                $  50,818               $  45,649
                                                                                                  =========               =========

      LIABILITIES AND STOCKHOLDERS' EQUITY
      ------------------------------------

CURRENT LIABILITIES:
      Accounts payable                                                                            $   6,714               $   5,897
      Line of credit                                                                                  3,651                   2,454
      Acquisition indebtedness                                                                        4,250                      --
      Accrued expenses                                                                                1,484                   1,468
      Deferred revenue                                                                                  681                     559
      Notes payable - accrued interest                                                                  257                      79
      Notes payable current portion                                                                   2,280                   1,812
      Liabilities of discontinued operations                                                            717                   4,181
                                                                                                  ---------               ---------
               TOTAL CURRENT LIABILITIES                                                             20,034                  16,450

DEFERRED REVENUE - long term                                                                             86                      91
LONG TERM NOTE PAYABLE                                                                                7,652                   3,505
                                                                                                  ---------               ---------
                       TOTAL LIABILITIES                                                             27,772                  20,046
                                                                                                  ---------               ---------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
      Preferred stock, $.0001 par value,  10,000,000 shares authorized; 583,124
      and 683,317  shares issued and  outstanding  as of March 31, 2005 and June
      30, 2004, respectively                                                                              1                       1
      Common stock, $.0001 par value, 150,000,000 shares authorized; 74,633,144
      and 58,430,597 shares issued and outstanding as of March 31, 2005 and June
      30, 2004 respectively                                                                               7                       5
      Additional paid-in capital                                                                    109,048                 100,822
      Deferred compensation                                                                            (103)                     --
      Accumulated other comprehensive loss                                                             (199)                   (170)
      Accumulated deficit                                                                           (85,708)                (75,055)
                                                                                                  ---------               ---------
               TOTAL STOCKHOLDERS' EQUITY                                                            23,046                  25,603
                                                                                                  ---------               ---------
               TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                         $  50,818               $  45,649
                                                                                                  =========               =========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


<PAGE>

                          DYNTEK, INC. AND SUBSIDIARIES
        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
                                 INCOME (LOSS)
                                   (Unaudited)
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                         Three Months Ended                Nine Months Ended
                                                                              March 31,                         March 31,
                                                                    -----------------------------     -----------------------------
                                                                         2005            2004             2005             2004
                                                                    ------------     ------------     ------------     ------------
<S>                                                                 <C>              <C>              <C>              <C>
REVENUES:
       Product Revenues                                             $     11,936     $      4,673     $     31,081     $     13,735
       Service Revenues                                                    7,113            7,423           22,753           21,087
                                                                    ------------     ------------     ------------     ------------
                Total revenues                                            19,049           12,096           53,834           34,822
                                                                    ------------     ------------     ------------     ------------
COST OF REVENUES:
       Cost of products                                                   10,383            3,846           25,984           11,893
       Cost of services                                                    5,450            5,767           17,801           16,809
                                                                    ------------     ------------     ------------     ------------
          Total cost of revenues                                          15,833            9,613           43,785           28,702
                                                                    ------------     ------------     ------------     ------------
GROSS PROFIT                                                               3,216            2,483           10,049            6,120
                                                                    ------------     ------------     ------------     ------------
OPERATING EXPENSES:
       Selling expenses                                                    3,096            1,494            7,469            5,134
       General and administrative expenses                                 1,490              985            4,231            3,098
       Non cash expense for warrants                                          51               --               94               --
       Depreciation and amortization                                         732              791            2,273            2,132
       Goodwill Impairment                                                    --               --            6,026            3,000
                                                                    ------------     ------------     ------------     ------------
                Total operating expenses                                   5,369            3,270           20,094           13,364
                                                                    ------------     ------------     ------------     ------------

LOSS FROM OPERATIONS                                                      (2,153)            (787)          (9,691)          (7,244)
                                                                    ------------     ------------     ------------     ------------
OTHER INCOME (EXPENSE):
       Loss on sale of marketable securities                                  --               --               --             (107)
       Loss on extinguishment of debt                                       (336)                             (336)              --
       Loss on investment                                                   (604)                             (604)              --
       Interest expense                                                     (529)            (199)          (1,205)            (700)
       Other expense                                                          --               --              (50)
       Interest income                                                         8                2               20               95
                                                                    ------------     ------------     ------------     ------------
                    Total other income (expense)                          (1,461)            (197)          (2,553)            (712)

LOSS FROM CONTINUING OPERATIONS                                     $     (3,614)    $       (984)    $    (12,244)    $     (7,956)

DISCONTINUED OPERATIONS
       Gain (loss) on disposal of discontinued operations                    (83)             (23)           1,593             (228)
                                                                    ------------     ------------     ------------     ------------
NET LOSS                                                            $     (3,697)    $     (1,007)    $    (10,651)    $     (8,184)
                                                                    ============     ============     ============     ============
NET LOSS PER SHARE: Basic and Diluted
       Continuing Operations                                                (.05)            (.02)            (.20)            (.17)
       Discontinued Operations                                                --               --              .03             (.01)
                                                                    ------------     ------------     ------------     ------------
                                                                    $       (.05)    $       (.02)    $       (.17)    $       (.18)
                                                                    ============     ============     ============     ============
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION -
           Basic and Diluted                                          66,811,175       48,215,944       62,760,620       46,453,466
                                                                    ============     ============     ============     ============

NET LOSS                                                            $     (3,697)    $     (1,077)    $    (10,651)    $     (8,184)

COMPREHENSIVE LOSS, NET OF TAX
       Change in unrealized gain (loss) on
       available-for-sale- securities                                          8                1               29               95
                                                                    ------------     ------------     ------------     ------------

COMPREHENSIVE LOSS                                                  $     (3,689)    $     (1,006)    $    (10,680)    $     (8,089)
                                                                    ============     ============     ============     ============
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


<PAGE>

                          DYNTEK, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                              ---------------------------
                                                                                                   Nine Months Ended
                                                                                                       March 31,
                                                                                              ---------------------------
                                                                                                2005               2004
                                                                                              --------           --------
<S>                                                                                           <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss - Continuing operations                                                         $(12,244)            (7,956)
                                                                                              --------           --------
     Adjustments to reconcile net loss, excluding  discontinued  operations,
     to net cash used in operating activities:
         Depreciation and amortization                                                           2,187              1,971
         Amortization of debt discount                                                              89                 --
         Amortization of deferred financing costs                                                  292                 --
         Amortization of capitalized software costs                                                 82                161
         Amortization of warrants issued for services                                               87                 --
         Loss on extinguishment of debt                                                            336                 --
         Loss on marketable securities                                                              --                107
         Interest on note payable                                                                   --                 33
         Impairment of goodwill                                                                  6,026              3,000
         Loss on preferred investment                                                              604                 --
         Notes receivable                                                                          378                 --
     Changes in operating assets and liabilities:
         Accounts receivable                                                                      (698)               (37)
         Inventory                                                                                 405                (45)
         Prepaid expenses                                                                           48               (366)
         Deposits and other assets                                                                (305)                51
         Accounts payable                                                                       (1,459)            (5,108)
         Deferred revenue                                                                          (26)               471
         Accrued expenses                                                                         (958)              (875)
         Restricted cash                                                                            62               (110)
                                                                                              --------           --------
              Total adjustments                                                                  7,150               (849)
                                                                                              --------           --------
         NET CASH USED IN CONTINUING OPERATIONS                                                 (5,094)            (8,805)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS                  (1,871)            (1,695)
                                                                                              --------           --------

NET CASH USED IN OPERATING ACTIVITIES                                                           (6,965)           (10,500)
                                                                                              --------           --------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Other notes receivable                                                                       (130)               (47)
     Cash proceeds from the sale of marketable securities                                           --                 71
     Cash paid for acquisitions                                                                 (6,486)                --
     Cash received from Redrock acquisition                                                        405                 --
     Cash received from ITI acquisition                                                            106                 --
     Capital expenditures                                                                         (622)              (134)
                                                                                              --------           --------
         NET CASH (USED IN) INVESTING ACTIVITIES                                                (6,597)              (110)
                                                                                              --------           --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from debt financing                                                                4,775              3,500
     Net proceeds under line of credit                                                             (78)             1,735
     Issuance of Common Stock, net of expenses                                                   6,884              5,375
                                                                                              --------           --------
         NET CASH PROVIDED BY FINANCING ACTIVITIES                                              11,581             10,610
                                                                                              --------           --------
NET  DECREASE IN CASH                                                                           (1,982)                --
CASH AT BEGINNING OF PERIOD                                                                      2,810                 --
                                                                                              --------           --------
CASH AT END OF PERIOD                                                                         $    828           $     --
                                                                                              ========           ========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


<PAGE>

                          DYNTEK, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                               Nine Months Ended
                                                                                                   March 31,
                                                                                            ----------------------
                                                                                             2005            2004
                                                                                            ------          ------
<S>                                                                                         <C>             <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest                                                                      $  616          $  490

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
     Forgiveness by shareholders of note and accrued interest                               $   --          $5,625

     Debt discount issued in connection with convertible debt                                   60              --

     Issuance of stock in connection with convertible debt                                      40              --

     Conversion of senior subordinated debt converted                                          509              --

     Acquisition of Red Rock Communications in 2004:
     Cash paid to shareholders                                                               3,000              --
     Gross cash acquired                                                                       405              --
     Contingent consideration                                                                2,000              --

     Acquisition of Integration Technologies Inc. in 2004:
     Cash paid to shareholders                                                               2,500              --
     Gross cash acquired                                                                       105              --
     Contingent consideration                                                                2,250

     Acquisition of AMR in 2004:
     Cash paid to shareholders                                                                 786              --
     Entellus earnout paid                                                                     200
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.


<PAGE>

                          DYNTEK, INC. & SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2005
                                  (UNAUDITED)

      1.    Basis of Presentation

The  accompanying  unaudited  condensed  consolidated  financial  statements  of
DynTek,  Inc.  and its  subsidiaries  ("DynTek",  "Company",  or "we") have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America,  for interim financial  statements and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and disclosures required for annual financial
statements.  These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related footnotes for
the year ended June 30, 2004 included in the Form 10-K for the year then ended.

The  accompanying   condensed  consolidated  financial  statements  reflect  all
adjustments,  which,  in the opinion of management  consist of normal  recurring
items that are necessary for a fair  presentation  in conformity with accounting
principles generally accepted in the United States of America. These adjustments
include   certain   reclassifications   to  reflect  the   disposal  of  certain
non-emergency  transportation  services  which were a component of the Company's
business process outsourcing segment. Preparing condensed consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets,  liabilities,  revenues and expenses. The results of
operations for any interim period are not necessarily  indicative of the results
attainable for a full fiscal year.

      2.    Liquidity and Financial Condition

The Company  incurred a net loss of $10,651,000  for the nine months ended March
31, 2005  including an aggregate of $9,428,000 in non-cash  charges  principally
consisting of a $6,026,000 goodwill impairment charge,  $604,000 write-down of a
preferred  stock  investment,  $378,000  in  note  reserves  and  $2,273,000  of
depreciation  and  amortization.  At March 31,  2005,  the Company had a working
capital  deficiency of $1,958,000,  which includes  $4,250,000 of  consideration
payable  to  the  sellers  of  Redrock  Communications,   Inc.  and  Integration
Technologies,  Inc.

The Company  believes that its cash on hand and cash it expects to generate from
operations  will sustain the business at least  through June 30, 2006.  However,
there  can be no  assurance  that the  Company  will  have  sufficient  funds to
implement  its  business  plan or that  the  implementation  of such  plan  will
generate  sufficient  cash flow. If the Company is not successful in its efforts
to  either  raise or  generate  sufficient  liquidity,  it could  be  forced  to
significantly  alter its  business  plan,  which could  include  making  further
reductions in overhead costs,  and/or divesting  itself of certain  contracts or
other assets.

      3.    Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned  subsidiaries.  All significant inter-company transactions have
been eliminated.

Revenue Recognition.

The Company  applies the revenue  recognition  principles  set forth under AICPA
Statement of Position ("SOP") 97-2 "Software Revenue Recognition" and Securities
and  Exchange   Commission  Staff  Accounting   Bulletin  ("SAB")  104  "Revenue
Recognition" with respect to all of

<PAGE>

its  revenue.  Accordingly,  the Company  records  revenue  when (i)  persuasive
evidence  of an  arrangement  exists,  (ii)  delivery  has  occurred,  (iii) the
vendor's fee is fixed or determinable, and (iv) collectability is probable.

The Company  also  reviews all of its product  sale  arrangements  to  determine
whether it has consummated such sales as a principal or an agent by applying the
criteria  set forth in  Emerging  Issues  Task Force Issue  ("EITF")  No.  99-19
"Reporting  Revenue  Gross as a  Principal  vs.  Net as an Agent".  The  Company
records revenue gross in  circumstances in which its role in consummating a sale
is more closely  aligned with a majority of factors that would indicate it acted
as a  principal  and net when its role in  consummating  a sale is more  closely
aligned with a majority of factors that would indicate it acted as an agent.

A summary of the Company's specific revenue recognition policies, as they relate
to specific revenue streams, is as follows:

      Computer Hardware Product Revenues

The Company requires all of its computer  hardware product sales to be supported
by a written  contract or other  evidence  of a sale  transaction  that  clearly
indicates  the selling  price to the  customer,  shipping  terms,  payment terms
(generally 30 days) and refund  policy,  if any.  Selling prices of the products
are fixed at the time the sale is consummated.

The Company  recognizes  revenue on computer hardware sales at the time in which
it  receives  a  confirmation  that the  goods  were  either  tendered  at their
destination  when shipped "FOB  destination," or transferred to a shipping agent
when "FOB shipping point."

      Software Product Revenues

The Company is an authorized  reseller of computer  software  licenses which may
include a post contract  customer support  arrangement and access to product and
upgrades and  enhancements  that are provided  exclusively  by the  manufacturer
following  delivery  and the  customer's  acceptance  of the  software  product.
Technical  support and access to upgrades  and  enhancements  to these  software
products  are solely the  responsibility  of the  software  manufacturer,  which
arrangement  is  contractually  known  to the  customer  at the time the sale is
consummated.

The Company's  software  product  sales are  supported by a written  contract or
other evidence of a sale  transaction,  which  generally  consists of a customer
purchase  order  or  on-line  authorization.  These  forms of  evidence  clearly
indicate  the selling  price to the  customer,  shipping  terms,  payment  terms
(generally  30 days) and refund  policy,  if any.  The  selling  prices of these
products are fixed at the time the sale is consummated.

The Company  recognizes revenue upon the sale of computer software licenses when
(a) it confirms that the customer has either  accepted  delivery of the software
or has been provided with a manufacturer's  authorization code ("key") to permit
access to the product and (b) the license term has commenced.

      Technical Services Revenue

The Company  provides  information  technology  services  that it bills based on
hours of service time provided at its standard hourly billing rates. The Company
recognizes  revenue  under  these  arrangements  upon  after  the  services  are
delivered and the customer has acknowledged  their acceptance of the services by
approving a work order milestone or completion order.

The  Company  also  provides   technical  services  under  certain  fixed  price
contracts.  The Company  recognizes  revenue under these  arrangements  when the
projects are completed and accepted by the customer. The Company is also a party
to certain  unit-price  contracts  that it bills  based on the number of service
units provided  (generally user seats)  multiplied by the


<PAGE>

agreed-upon  contract unit price per month. The Company  recognizes revenue over
the period of the contract.

      BPO Services Revenue

The Company  provides  business  process  outsourcing  ("BPO")  services,  which
primarily  include its child support service  contracts in the states of Kansas,
and  Nebraska.  The  Company  provides  these  services  under fixed price (flat
monthly fee) contracts and recognizes  this revenue as the services are provided
and billed.

In the state of North Carolina,  we have one contract subject to revenue-sharing
related  to child  support  services.  Under that  contract  a fee from  amounts
collected  is shared  with the  county on a  percentage  basis,  and  revenue is
recognized monthly in arrears as a percentage of the total amount of collections
received.

Inventories

The inventory consists primarily of finished goods in-transit which are recorded
at the lower of cost or market.

The Company had  included  $144,000 at June 30, 2004,  of computer  equipment in
conjunction  with its fixed unit priced Seat Management  contracts as inventory.
However that amount has been  reclassified  to Property and Equipment as of June
30, 2004 for comparative  purposes.  The amount of equipment associated with the
contracts as of March 31, 2005 was $485,000.  The Company recognizes the revenue
and  expense  monthly  over the  period of the  contract,  typically  thirty-six
months.

Use Of Estimates

The  Company's  financial  statements  and  accompanying  notes are  prepared in
accordance with accounting  principles  generally accepted in the United States.
Preparing  financial  statements  requires  management  to  make  estimates  and
assumptions  that affect the reported amounts of assets,  liabilities,  revenue,
and expenses.  These  estimates  and  assumptions  are affected by  management's
application of accounting policies.  Critical accounting policies for us include
revenue  recognition,  impairment of goodwill,  and accounting for  discontinued
operations.

Goodwill

SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested
for impairment at the reporting unit level (operating segment or one level below
an operating segment) on an annual basis (June 30th for the Company) and between
annual tests in certain  circumstances.  Application of the goodwill  impairment
test  requires  judgment,  including  the  identification  of  reporting  units,
assigning  assets and  liabilities  to reporting  units,  assigning  goodwill to
reporting units, and determining the fair value.  Significant judgments required
to estimate the fair value of reporting  units  include  estimating  future cash
flows, determining appropriate discount rates and other assumptions.  Changes in
these estimates and assumptions  could  materially  affect the  determination of
fair value and/or goodwill  impairment for each reporting unit. We have recorded
goodwill in  connection  with the  Company's  acquisitions,  most  recently  the
acquisitions  of  Redrock  Communications  in  September  2004  and  Integration
Technologies,  Inc.  in October  2004,  and  recorded  goodwill in the amount of
$4,455,000  and  $4,393,000,  respectively.  In these  instances,  goodwill  was
determined by comparing the purchase  price and related  transaction  costs with
the fair value of the net tangible assets and liabilities acquired, as set forth
in Note 14.


<PAGE>

Common Stock Purchase Warrants Issued in Private Placement Transactions

The Company  accounts for the issuance of common stock purchase  warrants issued
in connection  with sales of its common stock in accordance  with the provisions
of EITF 00-19 "Accounting for Derivative  Financial  Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".

Based on the  provisions  of EITF 00-19,  the Company  classifies  as equity any
contracts that (i) require physical  settlement or net-share  settlement or (ii)
gives the  company a choice of  net-cash  settlement  or  settlement  in its own
shares (physical settlement or net-share settlement).  The Company classifies as
assets  or  liabilities  any  contracts  that (i)  require  net-cash  settlement
(including a requirement  to net cash settle the contract if an event occurs and
if that event is outside the control of the company) (ii) give the  counterparty
a choice of net-cash settlement or settlement in shares (physical  settlement or
net-share settlement).

Fair Value Of Financial Instruments

The carrying amounts reported in the balance sheet for cash, trade  receivables,
accounts  payable  and  accrued  expenses  approximate  fair value  based on the
short-term  maturity  of  these  instruments.  The  carrying  amounts  of  notes
receivable and notes payable  approximate fair value as such instruments feature
contractual  interest  rates that are  consistent  with current  market rates of
interest.

Long Lived Assets

The Company periodically reviews the carrying values of its long lived assets in
accordance  with  SFAS 144  "Long  Lived  Assets"  when  events  or  changes  in
circumstances would indicate that it is more likely than not that their carrying
values may exceed  their  realizable  value and record  impairment  charges when
necessary.  The Company has determined that no impairment  charges are necessary
during the quarter ended March 31, 2005.

Discontinued Operations

During the fiscal year ended June 30, 2003,  the Company  adopted a plan to sell
its  transportation  brokerage  operations  in  the  state  of  Virginia.  These
operations  are accounted for as a  discontinued  operation,  and,  accordingly,
amounts in the  consolidated  financial  statements  and  related  notes for all
periods presented reflect discontinued operation accounting.

Recently Issued Accounting Pronouncements

In January 2003,  Financial  Accounting  Standards  Board  ("FASB")  issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This  interpretation  of  Accounting  Research  Bulletin  No. 51,  "Consolidated
Financial  Statements," provides guidance for identifying a controlling interest
in a variable  interest  entity  ("VIE")  established by means other than voting
interest.  FIN 46 also required  consolidation  of a VIE by an  enterprise  that
holds such  controlling  interest.  In December  2003,  the FASB  completed  its
deliberations  regarding  the proposed  modifications  to FIN No., 46 and issued
Interpretation  Number 46R,  "Consolidation  of Variable  Interest Entities - an
Interpretation  of ARB 51" ("FIN No. 46 R"). The  decisions  reached  included a
deferral of the effective date and provisions  for additional  scope  exceptions
for certain types of variable interests.  Application of FIN No. 46R is required
in  financial  statements  of public  entities  that have  interests  in VIEs or
potential  VIEs  commonly  referred to as  special-purpose  entities for periods
ending after December 15, 2003.  Application  by public small business  issuers'
entities is required in all interim and annual financial  statements for periods
ending after December 15, 2004.

The  adoption  of this  pronouncement  did not  have a  material  effect  on the
Company's financial statements.


<PAGE>

In December 2004,  the FASB issued  Statement of Financial  Accounting  Standard
("SFAS") No. 123R "Share Based  Payment".  This  statement is a revision of SFAS
Statement No. 123, "Accounting for Stock-Based  Compensation" and supersedes APB
Opinion  No. 25,  Accounting  for Stock  Issued to  Employees,  and its  related
implementation  guidance.  SFAS 123R  addresses all forms of share based payment
("SBP") awards  including  shares issued under  employee  stock purchase  plans,
stock options,  restricted stock and stock appreciation rights. Under SFAS 123R,
SBP awards  result in a cost that will be  measured at fair value on the awards'
grant date,  based on the  estimated  number of awards that are expected to vest
that will result in a charge to  operations.  This  statement is  effective  for
public entities that do not file as small business  issuers--as of the beginning
of the first interim or annual reporting period that begins after June 15, 2005.

The  Company is  currently  in the  process of  evaluating  the effect  that the
adoption of this pronouncement may have on its financial statements.

In December 2004,  the FASB issued  Statement of Financial  Accounting  Standard
("SFAS") no. 153  "Exchanges  of  Nonmonetary  Assets".  This  Statement  amends
Opinion 29 to  eliminate  the  exception  for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial  substance if the future cash flows of the entity are expected to
change  significantly  as a  result  of the  exchange.  The  provisions  of this
Statement,  which is to be applied prospectively,  are effective for nonmonetary
asset  exchanges  occurring  in fiscal  periods  beginning  after June 15, 2005.
Earlier  application is permitted for nonmonetary  asset exchanges  occurring in
fiscal periods beginning after December 16, 2004.

The adoption of this  pronouncement  is not expected to have material  effect on
the Company's financial statements. EITF Issue 04-8, "The Effect of Contingently
Convertible  Instruments  on Diluted  Earnings  per Share."  The EITF  reached a
consensus  that  contingently  convertible  instruments,  such  as  contingently
convertible  debt,  contingently  convertible  preferred  stock,  and other such
securities  should be  included  in  diluted  earnings  per share (if  dilutive)
regardless  of whether  the market  price  trigger has been met.  The  consensus
became effective for reporting periods ending after December 15, 2004.

The  adoption of this  pronouncement  does not  currently  have an effect on the
Company's financial statements because the inclusion of common stock equivalents
in earning per share are anti-dilutive.

      4.    Marketable Securities

Marketable  securities are  classified as available for sale in accordance  with
Statement of Financial  Accounting  Standard  ("SFAS") No. 115  "Accounting  for
Marketable Securities." Accordingly,  the unrealized loss resulting from valuing
such  securities at their  current  market values is presented as a component of
stockholders'  equity. At March 31, 2005, the unrealized loss on such securities
amounted to $199,000.

      5.    Investment in Preferred Stock

During the year ended June 30, 2004,  the Company agreed to convert a $1,104,000
note receivable due from Private Label Cosmetics, Inc. ("PLC") into 1,000 shares
of PLC preferred stock which it currently holds as an investment.  The preferred
shares are convertible,  at the Company's option,  into 306 shares of PLC Common
Stock and feature a  liquidation  provision in the event PLC is sold.  Dividends
are payable at $10,000 per quarter beginning March 31, 2005.

In February  2005,  the Company  received a letter from, and was contacted by, a
private  investor group (the  "Prospective  Investors") in which the Prospective
Investors   expressed  an  interest  in  acquiring  the  assets  of  PLC,  which
transaction could include a negotiated settlement of the


<PAGE>

Company's  preferred stock investment.  Based on this  information,  the Company
determined that the maximum amount of a recovery of its preferred  investment is
unlikely to exceed $500,000.  Accordingly the Company recorded a $604,000 charge
to  operations  during the quarter  ended March 31, 2005 to reduce the  carrying
amount of this investment to its estimated net realizable value.

      6.    Notes Receivable

Laborsoft Corporation

In September 2003, the Company converted  $636,000 of trade accounts  receivable
due from LaborSoft Corporation  ("LaborSoft"),  a 25% equity investee (Note 17),
into a  Promissory  Note and  Security  Agreement.  The  Promissory  Note  bears
interest at the prime rate,  (4.75% at March 31,  2005) and matures on September
21, 2006. LaborSoft granted the Company a security interest in its substantially
all of its assets which include accounts receivable,  equipment,  software,  and
other  intellectual  property,  inventory  and  intangible  assets.  The Company
established a $200,000 reserve of this note in fiscal year 2004.

At December 31, 2004,  the Company  converted  an  additional  $130,000 of trade
accounts  receivable  into an additional  promissory note that bears interest at
the prime rate and matures on December  31,  2007.  The  Company  increased  its
reserve on these notes by $378,000  during the quarter  ended March 31, 2005 due
to difficulty that Laborsoft has been experiencing in making scheduled  interest
payments.

Chief Executive Officer

On January 2, 2001,  the Company  advanced  $170,000 to Steven  Ross,  its Chief
Executive  Officer,  which is evidenced by a promissory note bearing interest at
8% per annum. On December 10, 2001, the Company extended the term of the note to
the end of Mr. Ross'  period of  employment.  On December 10, 2001,  the Company
forgave  $70,000 of such note as a bonus to Mr.  Ross.  At March 31,  2005,  the
remaining principal balance on this note amounts to $100,000.

      7.    Credit Facility

On June 30,  2003,  the Company  entered  into a twelve  month  credit  facility
agreement  with annual  automatic  renewals with an agency of Textron  Financial
Corporation  ("Textron").  Textron provides the Company with a full notification
factoring  facility for up to $7,000,000 of working  capital  collateralized  by
accounts receivable,  inventory, general intangibles and other assets. Under the
terms of such credit facility, Textron finances, with recourse, up to 85% of the
Company's eligible accounts receivable, as defined. Advances under this facility
bear interest at the prime rate plus 2% (7.75% at March 31, 2005).  In addition,
the Company pays a 0.15%  discount fee on all advances.  Effective  July 1, 2004
the Textron  agreement  was amended and  extended  for an  additional  period of
twenty four months. As of March 31, 2005,  $3,651,000 was outstanding under this
credit facility.

      8.    Senior Subordinated Convertible Notes

On  October  15,  2004  the  Company  entered  into  a  9%  Senior  Subordinated
Convertible  Note  Purchase   Agreement  (the  "Note  Agreement")  with  certain
investors  (the  "Purchasers")  in which it issued an aggregate of $4,438,775 in
principal amount of the Company's  Senior  Subordinated  Convertible  Notes (the
"Senior  Notes"),  bearing 9%  interest  at per annum  with a maturity  of three
years.  The Senior Notes are  convertible  into shares of the  Company's  common
stock at a conversion price of $.65 per share, subject to certain adjustments.

As part of the issuance of the Notes,  the Company also issued to the Purchasers
warrants to purchase  3,414,442  shares of the common stock at an exercise price
of $.7475 per share (the "Investor Warrants").  The Investor Warrants, which are
immediately exercisable,  expire on September 30, 2009. In addition, the Company
issued to Purchasers who had not previously


<PAGE>

participated in any financing of the Company  warrants to purchase up to 554,540
shares of the Common stock at an initial  exercise price of $1.25 per share (the
"Additional   Warrants").   The  Additional  Warrants,   which  are  immediately
exercisable, expire on June 10, 2005.

The Company  issued the Senior  Notes with an  effective  beneficial  conversion
feature amounting to $74,747 at their date of issuance based on an allocation of
the offering  proceeds to the Senior  Notes,  Investor  Warrants and  Additional
Warrants  based on their  relative  fair  values.  After  giving  effect  to the
allocation of such  proceeds in  accordance  with  Accounting  Principles  Board
Opinion  No. 14  "Accounting  for  Convertible  Debt and Debt  Issued with Stock
Purchase  Warrants"  ("APB 14") the Company  recorded an aggregate debt discount
amounting to $490,392.  Amortization of the discounts amounted to $74,821 during
the nine months  ended March 31, 2005 and is included as a component of interest
expense in the accompanying statement of operations.

The  Company  accounted  for the  issuance  of the Notes and the  aforementioned
warrants and  calculated  the amount of the effective  beneficial  conversion in
accordance with EITF Issue No. 00-27 "Accounting for Convertible Securities with
Contingent Beneficial Conversion Features or Contingently  Adjustable Conversion
Ratios."

The Company  incurred  $604,357 of expenses in connection with this  transaction
including  $559,603 of fees paid to Duncan  Capital LLC, the placement  agent in
this  transaction,  which  consist of cash in the amount  $515,357  and  692,308
common stock warrants (the  "Placement  Warrants") with a fair value of $44,246,
and other  expenses  paid to third parties  amounting to $44,754.  The Placement
Warrants are immediately exercisable at $.7475 per share and expire on September
30, 2009.

The Company registered for resale the underlying shares of Common Stock issuable
upon the conversion of the Notes and the exercise of the associated  warrants on
Form S-3 filed with the Securities and Exchange Commission on November 17, 2004.

In January  2005,  holders of  $501,000 in  principal  and $7,631 in interest of
Senior Notes converted  their notes into 782,505 shares of the Company's  Common
Stock. At March 31, 2005, the Company  currently had $3,937,775 of its 9% Senior
Notes outstanding.

      9.    Amended and Restated Secured Convertible Notes

On November  15,  2004,  the  Company  issued an Amended  and  Restated  Secured
Convertible  Term Note (the  "Amended  Note") to the Laurus  Master  Fund,  Ltd.
("Laurus  Funds").  The Amended Note replaced  previous notes outstanding in the
aggregate principal amount of $6,000,000 that were convertible into common stock
at $1.15 per share.

The Amended Note provided for a $1,000,000  increase in the principal balance of
the previous  notes and a deferred all principal  payments due under the Amended
Note until  December 1, 2005. In exchange,  the Company  reduced the  conversion
price under the Amended Note to $0.65 per share.  The  aggregate  principal  due
under the Amended Note at the date of the amendment  amounted to $6,649,999  and
is  convertible  into the Company's  common stock at the option of Laurus Funds.
Substantially  all assets of the Company  have been pledged as security for this
obligation.

The Amended Note provides for interest  payable at the greater of the prime rate
plus 1% per annum or 4% per annum.  The  Company,  at its option,  may repay the
principal and interest in shares of its common stock shares, if at the time such
stock is delivered (i) there exists an effective registration statement covering
the  distribution  of such  shares and (ii) the market  price for such shares is
greater than 115% of $0.65 per share, the contractual conversion price under the
Amended  Note.  Any  payments of  principal  that the Company may choose to make
under the Amended Note are subject to a 2% prepayment premium.


<PAGE>

In  connection  with this  transaction,  the  Company  also issued to the Laurus
Funds, a five-year amended and restated warrant to purchase  1,046,150 shares of
the  Company's  common  stock,  exercisable  at $0.65  per share  (the  "Amended
Warrant").  The Amended Warrant replaced the warrant previously issued to Laurus
Funds in connection with the  convertible  note financing which provided for the
purchase of 625,000 shares at an exercise price of $1.25 per share.

The Company  accounted for the issuance of the Amended Note in  accordance  with
the  guidelines  enumerated in EITF Issue No. 96-19  "Debtor's  Accounting for a
Modification  or  Exchange  of Debt  Instruments."  EITF 96-19  provides  that a
substantial  modification  of terms in an  existing  debt  instrument  should be
accounted  for like,  and reported in the same manner as, an  extinguishment  of
debt.  Further,  EITF 96-19 indicates that the modification of a debt instrument
by a debtor and a creditor in a  non-troubled  debt  situation is deemed to have
been accomplished with debt instruments that are substantially  different if the
present value of the cash flows under the terms of the new debt instrument is at
least 10 percent  different  from the present value of the remaining  cash flows
under the terms of the original instrument at the date of the modification.

The Company  evaluated its issuance of the Amended Note to determine whether the
increase  in  principal  and  extension  of the  maturity  date  resulted in the
issuance of a substantially  different debt instrument.  The Company  determined
that after giving effect to the all cash flows associated and expenses  incurred
in  connection  with its  issuance  of the Amended  Note,  that its had issued a
substantially  different  debt  instrument  that  constructively  resulted in an
extinguishment  of  the  original  debt  instrument.  The  Company  recorded  an
extinguishment  loss  in  the  amount  of  $336,000  that  is  included  in  the
accompanying  statements of operations for the three and nine months ended March
31, 2005.

      10.   Commitments, Contingencies, and Other Agreements

COMMONWEALTH OF VIRGINIA

      Effective  December 15, 2002, the Company entered into a mutual Settlement
Agreement (the "Settlement Agreement") to cancel a contract (the "Transportation
Contract") in which it provided non-emergency  transportation brokerage services
through third party providers (the "Transportation Vendors") to the Commonwealth
of Virginia ("Virginia"). Pursuant to the terms of the Settlement Agreement, the
Company agreed to make certain payments due to the Transportation  Vendors under
an agreed-upon  schedule through June 2003. At the time the Company entered into
the Transportation Contract,  DynCorp, Inc. ("Dyncorp") posted a $2,400,000 bond
(the "Bond") to guarantee its financial  performance under the contract in favor
of  Virginia.  Dyncorp also  indemnified  the Company for any  potential  losses
(obligations) in excess of $2,400,000 (the "Bonded  Amount").  Certain claims of
the Transportation Vendors caused the Bond to be called, initiating a process of
disbursing the Bonded Amount to Transportation  Vendors with verifiable  claims.
The bonding company filed an interpleader action (the "Interpleader  Matter") to
distribute  the Bonded  Amount on July 22,  2003.  In addition to making  claims
against the Bond in the Interpleader Matter, many of the Transportation  Vendors
initiated  separate  claims for payment  against the Company both as part of and
separate  from the  Interpleader  Matter.  The Company  provided  DynCorp with a
limited  release of its indemnity  for aggregate  claims in excess of the Bonded
Amount.  Accordingly,  the Company  assumed the  liability  for valid  claims in
excess of the Bonded Amount.

      The  Company  entered  into  settlement  agreements  with a number  of the
Transportation  Vendors  and, on December  1, 2004,  the Court  entered an Order
granting  the  Company's   Motion  to  Approve   Settlements  and  to  Authorize
Disbursement of  Interpleader  Funds (the "Order").  Pursuant to the Order,  the
Bonded  Amount  was  transferred  to the  Transportation  Vendors  by  DynTek in
accordance with the terms of various settlement agreements.


<PAGE>

      All claims in the Interpleader  Matter against the Bond and/or against the
Company,  except for two have been  settled and paid as of March 31,  2005.  All
Transportation  Vendors holding settled and paid claims have been dismissed from
the Interpleader Matter and pending state court lawsuits, if any, have also been
dismissed.  Of the two remaining unpaid claims,  one is settled and will be paid
in full by June 1, 2005 and will be dismissed  from the  Interpleader  Matter at
that time.

      The Company is still in  negotiations  and is proceeding  with  litigation
with the one  remaining  Transportation  Vendor  which  has not  entered  into a
settlement  agreement with the Company.  A portion of the Bonded Amount is being
held in escrow for this Transportation Vendor, if necessary.

      Consulting Services Agreement

On October 15, 2004,  the Company  entered into a one year  consulting  services
agreement  with DC Asset  Management,  LLC  ("DCAM")  that  provides for DCAM to
assist the Company with  identifying  and screening  acquisition  candidates and
structuring mergers and acquisitions and other  transactions.  As Consideration,
the Company issued a five-year warrant to purchase up to 1,150,000 shares of its
common  stock at an  exercise  price  of $.50  per  share,  which  exercise  was
subsequently increased to $.52 per share in February 2005.

The fair value of the  warrants  amounts to  $189,883,  is  included in deferred
compensation in the  accompanying  balance sheet and is being amortized over the
term of the agreement.  Amortization  expense under the agreement  amounted to $
87,000  and  is  included  in  general  and   administrative   expenses  in  the
accompanying statement of operations for the nine months ended March 31, 2005.

      11.   Stock Based Compensation

      During the year ended June 30,  2003,  the Company  adopted  Statement  of
Financial  Accounting  Standard  ("SFAS") No. 148,  "Accounting  for Stock-based
Compensation-Transition  and Disclosure."  This statement  amended SFAS No. 123,
"Accounting for Stock-based  Compensation." As permitted under SFAS No. 123, the
Company  applies the intrinsic  value method of  accounting  for its stock based
compensation in accordance with  Accounting  Principles  Board Opinion (APB) No.
25,  "Accounting for Stock Issued to Employees." As required under SFAS No. 148,
the following  table  presents  pro-forma net loss and basic and diluted  income
(loss)  per share as if the fair  value-based  method  had been  applied  to all
awards.

<TABLE>
<CAPTION>
                                                            Three Months Ended                  Nine Months Ended
                                                            ------------------                  -----------------

      Periods Ended March 31,                             2005              2004              2005              2004
      -----------------------                           --------          --------          --------          --------
<S>                                                     <C>               <C>               <C>               <C>
      Net Loss                                          $ (3,697)         $ (1,007)         $(10,651)         $ (8,184)
      Stock-based employee compensation
      cost, net of tax effect, under fair
      value accounting                                        35                33               140               297
                                                        --------          --------          --------          --------
      Pro-forma net loss under Fair Value Method        $ (3,732)         $ (1,040)         $(10,791)         $ (8,481)
                                                        ========          ========          ========          ========
      Loss per share:
      Basic and Diluted                                 $   (.05)         $   (.02)         $   (.17)         $   (.18)
                                                        ========          ========          ========          ========
      Pro-forma loss share: Basic and Diluted           $   (.05)         $   (.02)         $   (.17)         $   (.18)
                                                        ========          ========          ========          ========
</TABLE>


<PAGE>

      The fair value of each  option  grant was  estimated  at the date of grant
using  the  Black-Scholes  option  valuation  model.  The  Black-Scholes  option
valuation  model was developed  for use in  estimating  the fair value of traded
options which have no vesting  restrictions and are fully transferable.  Because
the Company's stock options have  characteristics  significantly  different from
those of traded options, and because changes in the subjective input assumptions
can materially  affect the fair value  estimate,  in management's  opinion,  the
existing models do not necessarily provide a reliable single measure of the fair
value estimate of its stock options. In calculating the fair values of the stock
options, the following assumptions were used:

                                                      Fiscal year    Fiscal year
                                                      2005 grants    2004 grants
                                                      -----------    -----------

        Dividend yield                                         --             --
        Weighted average expected life:                 2.2 years      3.0 years
        Weighted average risk-free interest rate            3.12%          1.79%
        Expected volatility                                   35%            77%

      12.   Stockholders' Equity

On August 14, 2001, the Company's  preferred stock became  convertible  into its
Class A common stock,  at a rate of 2.5 common shares for each  preferred  share
tendered.  As of March 31, 2005,  1,606,676  of such shares have been  converted
into  4,016,691  shares of  Common  stock  including  100,193  preferred  shares
converted  into 250,483 Class A common shares during the nine months ended March
31,  2005.  The Company  has an  aggregate  of 583,124  preferred  shares  still
outstanding at March 31, 2005 that are convertible into 1,457,810 Class A common
shares.

      Common Stock Held In Escrow

On October 7, 2004,  the Company issued 300,000 shares of its Common Stock to be
held  in  escrow  for  AMR  Networks.  The  shares  are  included  in the  total
outstanding  shares as of March 31,  2005.  However,  the shares do not have any
voting rights nor are they eligible for dividends,  if declared,  while they are
in escrow.  The issuance relates to the purchase of certain assets and contracts
from AMR  Networks.  The escrowed  shares may be earned and  distributed  over a
three year period of 100,000 shares annually upon annual fiscal year achievement
of $500,000 of gross profit.

      Issuances of Common Stock and Common  Stock  Purchase  Warrants in Private
      Placements of Debt

As  described  in Note 10, the Company  issued the  Company  issued a warrant to
purchase  1,150,000  shares  of  Common  Stock to DCAM on  October  15,  2004 in
connection with a one year consulting services agreement.

As described in Note 8, the Company  completed a private placement of its Senior
Notes on October 15, 2004, in which  transaction  it issued  3,414,442  Investor
Warrants, 554,540 Additional Warrants 692,308 Placement Warrants.

As of November  15,  2004,  the Company  issued an amended  five year warrant to
purchase  1,046,150  shares of Common  Stock,  exercisable  at $.65 per share in
relation to the Amended and Restated Secured Convertible Note, described in Note
9.

On November 15, 2004, the Company issued 61,538 shares of Common Stock to Duncan
Capital as a placement agent in connection with the Amended and Restated Secured
Convertible Note, described in Note 9.


<PAGE>

On January  18,  2005,  the Company  issued  782,505  shares of Common  Stock to
certain  holders  of  the  Company's  Senior  Subordinated   Convertible  Notes,
described in Note 8, upon the  conversion  of $508,631 in principal and interest
due to the holders of such Senior Notes.

      Private Placement of Common Stock

On February 10, 2005, the Company entered into a Securities  Purchase  Agreement
with certain  accredited  investors  who  purchased  an aggregate of  14,802,692
shares of Common Stock and warrants to purchase an aggregate of 3,701,919 shares
of  Common  Stock  for  approximately  $7,700,000.  The  Common  Stock  and  the
corresponding  warrant  were sold at a price of $.52 per  share of common  stock
issued.  Each warrant  entitles its holder to purchase  that number of shares of
Common  Stock equal to 25% of the Common  Stock  purchased  by such holder at an
exercise  price of $.66 per share.  The  warrants are  exercisable  for a period
beginning  six months  from  issuance  and  ending  five  years  thereafter.  In
connection  with the issuance of Common Stock and warrants in this  transaction,
the Company filed a registration statement on Form S-3 in February 2005.

      Registration Rights Agreements

Substantially  all of the  warrants  the Company  has issued in various  private
placement  transactions  are subject to  registration  rights  agreements  which
stipulate that the Company will use its commercially reasonable efforts to cause
a registration  statement to be declared  effective  under the Securities Act as
promptly  as  possible.   Substantially  all  of  the  Company's   warrants  are
exercisable by the holders at any time  irrespective of whether the registration
statement  has been  declared  effective.  In addition,  the Company is not (and
never is) precluded from delivering unregistered stock to any warrant holder who
elects to exercise their  warrants in the event that the Company's  registration
statement with respect to the stock  issuable  pursuant to such warrants has not
been declared effective.

The  Company's  registration  rights  agreements  generally  contain a provision
requiring  the Company to pay  defined  nominal  monetary  damages if it has not
caused a registration  statement to be declared effective.  The monetary amounts
under these agreements would accrue until such time that the unregistered shares
may be sold (without any action on the part of the Company)  under Rule 144. The
Company is in compliance with all of its registration  rights  agreements and in
the past has not has not  failed  to cause  any  registration  statements  to be
declared effective under any such agreements.

Since the Company (a) is not precluded from issuing  unregistered  shares in the
event of its failure to cause a registration statement to be declared effective,
(b) is  permitted  to net share  settle its  warrants  by  issuing  unregistered
shares,  and (c) has met all of the other  criteria  for  equity  classification
under EITF 00-19, it has classified its warrants as equity instruments.

      13.   Loss per Share

Basic earnings per share is computed on the basis of the weighted average number
of common  shares  outstanding.  Diluted  earnings  per share is computed on the
basis of the  weighted  average  number of common  shares  outstanding  plus the
effect of outstanding  stock options using the "treasury  stock method".  Common
stock  equivalents  consisting  of  options,  warrants,  convertible  debt,  and
convertible preferred stock totaling 123,551,501 and 69,915,192 were excluded in
the diluted  weighted  average  calculation for the three months ended March 31,
2005 and March 31, 2004 respectively as their effect would be anti-dilutive.


<PAGE>

Total outstanding stock, options,  convertible preferred stock, convertible debt
and warrants are as follows:

            --------------------------------------------------------
                                                 As of March 31,
                                               2005          2004

            Common stock                    74,633,144    49,711,654
            Options and warrants            30,061,274    13,915,420
            Convertible debt                16,734,172     3,888,888
            Convertible preferred stock      1,457,810     2,399,230
                                           -------------------------
                                           122,886,400    69,915,192
                                           =========================

      14.   Business Acquisitions

Redrock Communications

      On September 29, 2004, the Company entered into a Stock Purchase Agreement
(the  "Agreement")  effective  August 1, 2004 to acquire all of the  outstanding
Common Stock of Redrock Communications Solutions, Inc., ("Redrock") for purchase
consideration consisting of (i) an initial aggregate cash payment of $2,500,000;
(ii) a deferred  aggregate  cash  payment of $500,000  payable 60 days after the
closing  date;  (iii)  an  earn-out  cash  payment  up to a  maximum  amount  of
$1,500,000,  based upon Redrock's  EBITDA for the period of July 1, 2004 through
June 30, 2005 (the "Earn-Out Payment") and (iv) $500,000 of the Company's common
stock,  subject to  adjustment  based on the final  determination  of  Redrock's
working  capital,  divided by $.63,  the average  closing price of the Company's
common stock for the 10 trading preceding the closing date.

      An  employee  of  Redrock   Communications   Solutions,   Inc.,  a  Nevada
corporation  "Redrock"),  is claiming that he owns up to one-third  (1/3) of the
outstanding  shares  of Common  Stock of  Redrock  at the time of the  Company's
acquisition of the  outstanding  shares of Redrock  pursuant to a Stock Purchase
Agreement  dated  September  29, 2004,  by and among the Company and the two (2)
holders of record (the  "Sellers")  of the  outstanding  shares of Redrock  (the
"Redrock  Agreement").  The  Redrock  employee  thereby is  claiming  that he is
entitled to receive one-third (1/3) of the consideration paid by the Company for
the  acquisition  of  all  then-outstanding  shares  of  Redrock  (the  "Redrock
Dispute").  The Redrock Agreement provides an indemnification for the benefit of
the  Company  by  the  Sellers  of  any  breach  or  inaccuracy  of  any  of the
representations  and  warranties  made by the  Sellers  and the  Company  in the
Redrock  Agreement,  which  include  representations  with  respect to Redrock's
capital structure, its securities then-outstanding and the Sellers' ownership of
the shares of Redrock stock. No complaint has been filed, and the parties in the
dispute have  discussed the  possibility  of mediation as a means to resolve the
dispute.

      As a result of this dispute,  the Company intends to withhold the Earn-Out
Payment that is payable to the Sellers pursuant to the Redrock Agreement as part
of the  consideration  for the  purchase  of the  Redrock  shares to offset  any
indemnification  claims that the Company may have  against the Sellers  once the
dispute is  resolved.  The Company  will  release the  Earn-Out  Payment that is
withheld upon execution by the Redrock  employee of a letter of affirmation  and
waiver of any claims he might have against the Company.


<PAGE>

A summary of the business assets acquired (in thousands) is as follows:

      Consideration paid:
      -------------------
      Stock to be issued                                            $  500
      Cash                                                           3,000
      Earn-Out                                                       1,500
      Liabilities assumed                                            2,095
                                                                    ------
      Total consideration                                           $7,095
                                                                    ------
      Assets acquired:
      ----------------
      Cash                                                             405
      Accounts receivable, net                                       1,221
      Inventory                                                        115
      Prepaid expenses, deposits and other assets                        8
      Property and equipment                                           136
      Customer list                                                    755
      Goodwill                                                       4,455
                                                                    ------
      Fair value of assets acquired                                 $7,095
                                                                    ------

      In February 2005, the Company and the Sellers  entered into a Satisfaction
and Release  Agreement  based on  performance  of the Redrock  business  through
January 31, 2005, and the opportunity for the Company to consolidate the Redrock
operations with other operations of the Company.  Based on these  considerations
and the EBITDA of the Redrock  business through such date, the Company agreed to
pay the Earn Out payment of $1,500,000 to the Sellers on July 30, 2005,  subject
to any indemnification offset under the Redrock Dispute.

Integration Technologies Inc.

      On October 14, 2004,  the Company  entered  into an Agreement  and Plan of
Merger (the  "Merger  Agreement"),  by and among the  Company,  ITI  Acquisition
Corp.,  a  California  corporation  and wholly owned  Subsidiary  of the Company
("Merger  Sub"),  Integration  Technologies,   Inc.,  a  California  corporation
("ITI"), the shareholders of ITI (the "Shareholders") and Casper Zublin, Jr., in
his capacity as the shareholder representative (the "Representative").

      On October 18, 2004,  the Merger Sub was merged into ITI with ITI becoming
a wholly-owned subsidiary of the Company (the "Merger").  The consideration paid
or payable to the  Shareholders  in connection  with the Merger is comprised of:
(i) an initial cash payment of $2,500,000; (ii) an earn-out cash payment up to a
maximum  amount of $1.5 million,  based upon ITI's EBITDA for the period between
July 1, 2004 through June 30, 2005 to be paid on or before July 30, 2005;  (iii)
a earn-out cash payment up to a maximum amount of $1.5 million, based upon ITI's
revenue for the period  between July 1, 2004 through June 30, 2005 to be paid on
or before July 30, 2005; and (iv) an aggregate number of whole shares of Company
common  stock  based on the  average  closing  sale price per share (the  "Share
Price") of such  common  stock for the 30 trading  days prior to June 28,  2005,
determined as follows:  (a) 2,140,000  shares if the Share Price is greater than
$1.00 but less than $1.50; (b) that number of shares equal to $2,140,000 divided
by the Share  Price if the Share  Price is less than  $1.00,  provided  that the
maximum number of shares  issuable  pursuant to this clause (b) shall be no more
than 4,280,000 shares; or (c) that number of shares equal to $3,210,000  divided
by the  Share  Price if the  Share  Price is  greater  than  $1.50  (the  "Stock
Consideration").  At the option of the Representative, up to fifty percent (50%)
of the Stock  Consideration may be paid in cash instead of Company Common Stock.
In no event will the Company be required to issue shares of Company Common Stock
if such issuance would require stockholder approval under the Nasdaq Marketplace
Rules  assuming  such  rules are  applicable.  In the event the number of shares
issuable  as  Stock  Consideration  is so  limited,  the  Company  will  pay the
difference to the Shareholders in cash.


<PAGE>

A summary of the business assets acquired (in thousands) is as follows:

      Consideration paid:
      -------------------
      Cash                                                           2,500
      Earn-out                                                       2,250
      Liabilities assumed                                            2,542
                                                                    ------
      Total consideration                                           $7,292
                                                                    ------
      Assets acquired:
      ----------------
      Cash                                                             105
      Accounts receivable, net                                       1,952
      Inventory                                                         12
      Prepaid expenses, deposits and other assets                      101
      Property and equipment                                           329
      Customer list                                                    400
      Goodwill                                                       4,393
                                                                    ------
      Fair value of assets acquired                                 $7,292
                                                                    ------

      In  February  2005,  the  Company  and  the  Shareholders  entered  into a
Satisfaction  and Release  Agreement  based on  performance  of the ITI business
through  January 31, 2005,  the  performance of certain former ITI employees who
had undertaken  additional  responsibilities at the Company, and the opportunity
for the Company to consolidate the ITI operations  with other  operations of the
Company.  Based on  these  considerations  and the  EBITDA  of the ITI  business
through such date,  the Company  agreed to pay the amount of  $2,250,000  to the
Shareholders  on July 30, 2005 in  satisfaction  of the earn-out  cash  payments
based upon ITI's EBITDA and revenue.

The following unaudited pro-forma information reflects the results of continuing
operations of the Company as though the  acquisitions had been consummated as of
July 1, 2003 (in thousands).

-----------------------------------------------------------
 (000's)                       Nine Month ended March 31,
-----------------------------------------------------------
                               2005                2004
-----------------------------------------------------------
 Revenue                      $57,993             $50,974
-----------------------------------------------------------
 Net Loss                     (10,218)             (9,715)
-----------------------------------------------------------
 Net Loss per share              $.11                $.21
-----------------------------------------------------------

      15.   Discontinued Operations

During 2003, the Company disposed of its non-emergency  transportation business.
As of March 31, 2005, the total remaining liabilities of discontinued operations
amounted to $717,000.  A  significant  portion of such  payables are owed to the
Transportation Vendors involved in the Interpleader Matter described in Note 10.

      16.   Business Segments

DynTek's  operations  are  organized  along its  product  lines and  include two
segments;  Information  Technology  Services  and Business  Process  Outsourcing
Services.  The  Information  Technology  Services  segment  provides  a range of
specialized IT infrastructure  services:  system  architectural  design,  legacy
systems integration,  network  engineering,  applications  development,  network
security services, help desk support and operational support, primarily to state
and local government entities and mid-market commercial entities. In conjunction
with  these  service  offerings,  it also sells  hardware  and  software  to its
customers.  Operations are distributed  primarily among seven states California,
New York, Michigan Florida, Massachusetts,  Nevada, and Virginia, with employees
situated in locations that are convenient to client sites.


<PAGE>

The Business Process Outsourcing segment contracts outsourced program operations
for state government  agencies in several areas,  including the privatization of
child support enforcement  services.  Our business process outsourcing customers
have included various governmental  departments in the states of North Carolina,
Kansas and Nebraska. The Company maintains employee locations in these states as
well. Typically these contracts are for multi-year periods of performance,  with
options to renew for additional  periods.  Such contracts are generally  awarded
through  competitive  procurements.  Payment  is  based on  either  fixed-price,
fixed-unit-  price  based on  contractual  allocations,  revenue  sharing,  or a
combination of the above.

Our  reportable  segments are business units that offer  different  services and
contract  types and are managed  separately  due to the  expertise and different
managed  key  factors  in each  area.  Since the  separate  Business  Processing
Outsourcing  segment was acquired as a unit,  management  has retained  separate
reporting and review criteria for that unit. The following table provides actual
selected financial data for our business segments (in thousands):

<TABLE>
<CAPTION>
                                                          Business            Information
                                                          Process              Technology                Total
                                                        Outsourcing             Services                 -----
                                                        -----------             --------
<S>                                                          <C>                  <C>                   <C>
Three months ended March 31, 2005
---------------------------------
Sales to external customers                                  $2,456               $16,593               $19,049
Depreciation and amortization expense                           117                   615                   732
Goodwill impairment                                              --                    --                    --
Operating income (loss)                                          47                (2,200)               (2,153)
Net interest expense                                             --                   529                   529
Total assets                                                  8,336                42,482                50,818
Capital expenditures                                             --                    78                    78

Three months ended March 31, 2004
---------------------------------
Sales to external customers                                  $2,145                $9,951               $12,096
Depreciation and amortization expense                           123                   668                   791
Goodwill impairment                                              --                    --                    --
Operating income (loss)                                         234                (1,021)                   --
Net interest expense                                             --                   199                   199
Total assets                                                 22,509                26,565                49,074
Capital expenditures                                             --                    18                    18

Nine months ended March 31, 2005
--------------------------------
Sales to external customers                                  $7,333               $48,501               $53,834
Depreciation and amortization expense                           351                 1,922                 2,273
Goodwill impairment                                           5,741                   285                 6,026
Operating (loss)                                             (5,637)               (4,054)               (9,691)
Net interest expense                                             --                 1,205                 1,205
Total assets                                                  8,336                42,482                50,818
Capital expenditures                                             27                   595                   622

Nine months ended March 31, 2004
--------------------------------
Sales to external customers                                  $7,159               $27,663               $34,822
Depreciation and amortization expense                           345                 1,787                 2,132
Goodwill impairment                                              --                    --                    --
Operating (loss)                                             (2,903)               (4,341)               (7,244)
Net interest expense                                             --                   700                   700
Total assets                                                 22,509                26,565                49,074
Capital expenditures                                             78                    56                   134
</TABLE>


<PAGE>

      17.   Related-Party Transactions

In March 2001, the Company  purchased 25% of the equity of LaborSoft,  a company
that provides labor relations management software to labor unions and commercial
customers,  to supplement its other market segment services.  In connection with
such investment,  the Company  appointed one of its directors to become chairman
of LaborSoft's board of directors, a position which he served until August 2004,
at which time he resigned.  Through  December  2004,  the Company also  provided
infrastructure  services  to  LaborSoft,   under  a  cost  plus  fee-for-service
agreement.

The Company  accounts for its investment in LaborSoft under the equity method of
accounting.  Accordingly,  the Company records its pro-rata share of LaborSoft's
income (loss) as an increase (decrease) in the carrying value of its investment.
The Company's  pro-rata share of  LaborSoft's  losses since March 2001 amount to
approximately  $456,000.  Such losses have  eliminated the carrying value of the
LaborSoft investment.


<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS

The following discussion and analysis of our results of operations and financial
position should be read in conjunction with our audited  consolidated  financial
statements  and related notes included in our Annual Report on Form 10-K for the
year ended June 30, 2004 and the unaudited consolidated financial statements and
related notes included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q and in future filings
with the Securities and Exchange Commission include "forward-looking statements"
within the  meaning of such term in Section 27A of the  Securities  Act of 1933,
Section 21E of the Securities  Exchange Act of 1934, and the Private  Securities
Litigation  Reform Act of 1995.  The  Company  wishes to caution  readers not to
place  undue  reliance  on any such  forward-looking  statements,  each of which
speaks only as of the date made.  Forward-looking  statements  involve known and
unknown  risks,  uncertainties  and  other  factors  which  could  cause  actual
financial or operating results, performance or achievements expressed or implied
by such forward-looking  statements not to occur or be realized. Such statements
are subject to certain risks and  uncertainties  that could cause actual results
to differ materially from historical results and those presently  anticipated or
projected.  See a discussion  of such risks and factors in the "Factors That May
Affect Future Results"  section of our Annual Report on Form 10-K for the fiscal
year ended June 30, 2004 as filed with the Securities  and Exchange  Commission.
Forward-looking  statements  made in this Form 10-Q  generally  are based on our
best estimates of future results, performances or achievements,  predicated upon
current  conditions  and the most recent  results of the companies  involved and
their respective industries. Forward-looking statements may be identified by the
use of  forward-looking  terminology such as "may," "will,"  "could,"  "should,"
"project," "expect," "believe," "estimate,"  "anticipate," "intend," "continue,"
"potential,"  "endeavor,"  "opportunity"  or similar terms,  variations of those
terms or the  negative  of those  terms or other  variations  of those  terms or
comparable  words or  expressions.  Potential risks and  uncertainties  include,
among other things, such factors as:

o     Our ability to reach  target  markets for  services  and  products and our
      ability to retain current and attract future customers;

o     Our  ability  to  successfully   integrate  acquired  companies  into  our
      operations, and our ability to acquire additional companies, if any;

o     Our ability to turn contract backlog into revenue and net income, the size
      and timing of additional orders and their  fulfillment,  as well as market
      acceptance,  revenues and profitability of our current and future products
      and services;

o     Our ability to finance and sustain  operations,  including  the ability to
      fund, maintain,  replace and/or extend the Textron credit facility,  which
      is discussed in Note 7, and/or the Senior Subordinated  Convertible Notes,
      discussed in Note 8, and/or the Amended Note to Laurus Funds, discussed in
      Note 9, when any becomes due, respectively, or to replace such instruments
      with alternative financing;

o     Our  ability to raise  equity  capital or debt in the  future,  if needed,
      despite historical losses from operations;

o     Our ability to successfully  defend or settle the remaining  claims in the
      Virginia litigation;

o     The  continuing  desire of state and local  governments  to  outsource  to
      private contractors, and our ability to service such contracts;

o     General economic conditions in the United States and elsewhere, as well as
      the economic conditions  affecting the industries in which we operate, our
      customers and suppliers;

<PAGE>

o     The  competitive  environment in the regions in which we compete,  and the
      cost-effectiveness of our products and services;

o     Political and  regulatory  matters that affect the  industries in which we
      operate;

o     Our continued ability to trade on the NASD bulletin board; and

o     Other risks  detailed  in our filings  with the  Securities  and  Exchange
      Commission.

The Company has no obligation  to publicly  release the results of any revisions
to any forward-looking statements to reflect anticipated or unanticipated events
or circumstances occurring after the date of such statements.

Business Overview

We provide information  technology ("IT") security,  voice and data convergence,
enterprise access,  network  infrastructure and technology management solutions.
We serve as a source  of  products  and  services  primarily  to state and local
government clients,  educational institutions and mid-market commercial clients.
Our practice areas incorporate an approach and methodology  derived from over 18
years of experience in the assessment,  design,  implementation,  management and
support  of  technology  solutions.  We  provide  our  clients  with a suite  of
professional  IT  services,  including  security  risk  assessment,  design  and
remediation;  technology  project  management;  secure  access and  connectivity
consulting;  remote  network  monitoring  and  management;  network  and  system
diagnostics;   product  maintenance  and  support;   technology  training;   and
integration  of network  computing  products and  applications.  We also provide
total  solutions  for our  clients  through  sales and  installation  of network
computer   products  and  computer   applications   from  leading   vendors  and
manufacturers.

We   provide   our   clients   with  a   solutions-based   approach   based   on
multi-disciplinary  practices  in  security,  access  infrastructure,  converged
networks,   IP   telephony  or   voice-over   IP   ("VOIP"),   and   application
infrastructure.  We are focusing on growing our multi-disciplinary practices and
related product offerings,  while maintaining expense controls and improving our
balance  sheet.  We intend to continue to seek  acquisitions  and organic growth
that will build  threshold  share and critical  density in our target markets of
the  leading IT  spending  states.  Moreover,  we intend to build upon our track
record of  award-winning  vendor  performance to strengthen  relationships  with
product  manufacturers  and  distributors  in order to enhance  our  competitive
advantage  and ensure  delivery of high  quality IT products and services to our
clients.

We recognize revenue from sales of products and services. Services are primarily
provided  to the  client at hourly  rates that are  established  for each of our
employees or third-party  contractors  based upon their skill level,  experience
and  the  type  of  work  performed.  We also  provide  project  management  and
consulting  work which are billed  either by an agreed  upon fixed fee or hourly
rates, or a combination of both. The majority of our services are provided under
purchase  orders  or bid  contracts  with  government  entities.  (See  "Revenue
Recognition," below)

Costs of services  consist  primarily  of salaries  of  services  personnel  and
related expenses incurred in providing such services, and the cost of outsourced
service labor.  Costs of products consist of our cost of products  purchased and
sold to our customers.  Selling,  general and  administrative  expenses  consist
primarily of salaries and benefits of personnel  responsible for administrative,
finance,  sales  and  marketing  activities  and all  other  corporate  overhead
expenses.  Corporate  overhead  expenses  include  rent,  telephone and internet
charges,  insurance  premiums,  accounting  and legal  fees,  and other  general
administrative expenses.


<PAGE>

Results of Operations

Continuing Operations

The following  table sets forth for the periods  presented  information  derived
from  our  unaudited   condensed   consolidated   statement  of  operations  (in
thousands):

Revenues

<TABLE>
<CAPTION>
                           For the Three Months ended                            For the Nine Months ended
               ---------------------------------------------------------------------------------------------------------
                                    March 31,                                            March 31,
               ---------------------------------------------------------------------------------------------------------
                                           Percentage     Amount                                 Percentage
                   2005        2004          change                     2005         2004          change       Amount
               ---------------------------------------------------------------------------------------------------------
<S>    <C>       <C>          <C>              <C>        <C>          <C>          <C>              <C>       <C>
Product(1)       $ 7,044      $4,673           51%        $2,371       $19,315      13,735           41%       $ 5,580
Service(1)         5,542       7,423          (25%)       (1,881)       16,609      21,087          (21%)       (4,478)
                 -------      ------         ----         ------       -------     -------         ----        -------
Total (1)         12,586      12,096            4%           490        35,924      34,822            3%         1,102
Product(2)         3,239         n/a          100%         3,239         8,239         n/a          100%         8,239
Service(2)           534         n/a          100%           534         3,586         n/a          100%         3,586
                 -------      ------         ----         ------       -------     -------         ----        -------
Total(2)           3,773         n/a          100%         3,773        11,825         n/a          100%        11,825
Product(3)         1,653         n/a          100%         1,653         3,527         n/a          100%         3,527
Service(3)         1,037         n/a          100%         1,037         2,558         n/a          100%         2,558
                 -------      ------         ----         ------       -------     -------         ----        -------
Total(3)           2,690         n/a          100%         2,690         6,085         n/a          100%         6,085
Totals           $19,049     $12,096           57%        $6,953       $53,834     $34,822           55%       $19,012
                 =======     =======         ====         ======       =======     =======         ====        =======
</TABLE>

      (1)   Revenues from Redrock and Integration  Technologies are excluded for
            comparative purposes.

      (2)   Represents revenues generated from Redrock following the acquisition
            on August 1, 2004.

      (3)   Represents   revenues   generated  from   Integration   Technologies
            following the acquisition on October 1, 2004.

Three Months ended March 31, 2005 and 2004

Revenues  for the three months  ended March 31, 2005  amounted to  approximately
$19,049,000  as compared  with  revenues of  approximately  $12,096,000  for the
comparable 2004 period, an increase of approximately 57 percent.  The $6,953,000
increase in revenue during the quarter is primarily  attributable to an increase
of $6,463,000 in revenues  from our  Southwest  region,  comprised of the former
businesses of Redrock and ITI.  Products  accounted for approximately 63% of our
revenues  during the  three-month  period,  and services  accounted for 37%. The
decrease  in  service  revenue  from the prior  period is due  primarily  to the
expiration of a large services contract with the State of New York.

Our customers are primarily  state and local  government  entities and mid-sized
corporations  in  diversified  industries.  For the three months ended March 31,
2005, 48% of our customers were commercial  entities  compared to 52% government
and education clients. This represents a significant change in customer mix from
the  corresponding  period in 2004  when 18% of our  customers  were  commercial
entities and 82% of our customers  were  government and education  clients.  The
change in mix  results  from our  decision to reduce our  dependence  overall on
state and local government  business and to grow our commercial  business.  This
change was


<PAGE>

effected through the addition of the Redrock and ITI businesses in our Southwest
region,  which had a stronger  commercial  emphasis,  and an increased  focus in
other regions on commercial clients.

Twenty-five of our customers  accounted for 47% of our total revenues and 37% of
our total  accounts  receivable  during the  quarter.  Although no one  customer
accounted for 10% or more of our revenues,  the loss of major customers could be
expected to have a material adverse effect on our financial condition during the
short term and until we are able to generate replacement business, and there can
be no assurance of obtaining such business.

Nine Months ended March 31, 2005 and 2004

Revenues  for  the  nine  month   period  ended  March  31,  2005   amounted  to
approximately $53,834,000,  as compared to revenues of approximately $34,822,000
during the same  nine-month  period for the prior  fiscal  year,  an increase of
approximately 55%. This $19,012,000 increase resulted primarily from $17,916,000
in additional revenues from our Southwest region, which was formed subsequent to
the acquisitions of Redrock in September 2004 and ITI in October 2004.  Products
comprised  approximately  58% of our revenues during the nine month period,  and
services comprised approximately 42%.

Gross Profit

Three Months ended March 31, 2005 and 2004

Gross  profit for the three month  period  ended March 31, 2005 was  $3,216,000,
compared to $2,483,000  during the comparable  2004 period.  Gross profit margin
from service  revenue  increased  from 22% in the 2004 period to 23% in the 2005
period.  However,  gross profit margin from product sales  decreased from 18% in
the three months ended March 31, 2004 to 13% during the three months ended March
31, 2005.  This,  together  with the impact of a higher  relative  percentage of
products  sold in the 2005 period,  led overall  gross profit margin to decrease
from 20% in the 2004 period to 17% in the 2005  period.  The decrease in product
margin  was  primarily  due to  approximately  $2 million in sales of low margin
products to certain  state  government  customers  upon contract  renewals.  The
increase  in  service  margin  revenue   reflects   continued   improvements  in
utilization and an increase in sales of more  comprehensive  service  offerings.
Although  we have  improved  our  service  margins,  and will  continue  to seek
additional  improvements,   our  product  margins  are  subject  to  competitive
pressures  and  fluctuations  from  quarter to quarter  depending  on the mix of
products sold.

Nine Months ended March 31, 2005 and 2004

Gross profit margin during the nine months ended March 31, 2005 increased to 20%
from 19% in the  comparable  nine month  period in the prior year.  Gross profit
margin from product  sales  increased  from 13% to 16%, and gross profit  margin
from service  revenue  increased from 23% to 24%. These increases were primarily
due to the sale of higher  margin  products  during  the nine  period and higher
margins  in  services  resulting  from  improved   utilization  of  our  service
consultants.

We  continue to face  competitive  market  pressures  which may impact the gross
profit on our product revenue and service related revenue. We intend to meet the
challenges  of  aggressive  price  reductions  and  discount  pricing by certain
product  suppliers by focusing our  offerings  around  relatively  higher margin
practice  areas,   including  security  solutions,   voice  over-IP  and  access
infrastructure.  There  can be no  assurance,  however,  that we will be able to
improve  profit  margins and compete  effectively  and  profitably in all areas,
given the intense competition currently existing in the IT industry.


<PAGE>

Selling, General and Administrative

The following  table sets forth for the periods  presented  information  derived
from  our  unaudited   condensed   consolidated   statement  of  operations  (in
thousands):

<TABLE>
<CAPTION>
                                       For the Three Months ended                         For the Nine Months ended
                                               March 31,                                          March 31,

                                  Dollars                  Percentage of              Dollars                 Percentage of
                                                              Revenues                                           Revenues
                              2005        2004           2005         2004       2005         2004          2005         2004
                           ----------------------------------------------------------------------------------------------------
<S>                         <C>         <C>               <C>          <C>     <C>            <C>            <C>          <C>
Selling(1)                  $ 2,090     $ 1,494           17%          12%     $ 5,191        5,134          14%          15%
General &
Administrative(1)             1,490         985           12%           8%       3,637        3,098          10%           9%
Depreciation &
Amortization(1)                 619         791            5%           7%       2,022        2,132           6%           6%
Goodwill impairment              --           0           --           --        6,026        3,000          17%           8%
Other(1)                         51           0           --           --           83            0           *           --
                            -------     -------         ----         ----      -------        -----        ----         ----
Total                       $ 4,250     $ 3,270           34%          27%     $16,959       13,364          47%          38%
Selling(2)                    1,006         n/a           15%         n/a        2,278          n/a          13%         n/a
General &                                                n/a          n/a          241          n/a           1%         n/a
Administrative(2)                --          n/a          --          n/a          251          n/a           1%         n/a
Depreciation &
Amortization(2)                 113           2%
Other(2)                         --         n/a           --          n/a           11          n/a           *          n/a
                            -------     -------         ----         ----      -------        -----        ----         ----
Total                       $ 1,119         n/a           17%         n/a      $ 2,781          n/a          15%         n/a
Totals                      $ 5,369     $ 3,270           28%          27%     $19,740      $13,364          37%          38%
                            =======     =======         ====         ====      =======      =======        ====         ====
</TABLE>

      (1)   Expenses from Redrock and Integration  Technologies are excluded for
            comparative purposes

      (2)   Represents  expenses  generated by Redrock following its acquisition
            on  August  1,  2004  and  Integration  Technologies  following  its
            acquisition on October 1, 2004. Redrock and Integration Technologies
            operations were combined on February 11, 2005.  Therefore,  Selling,
            General and Administrative expenses are now combined.

      *     less than 1%

Three Months ending March 31, 2005 and 2004

Selling,   general  and  administrative   expenses  increased  to  approximately
$4,586,000  in  the  three  months  ended  March  31,  2005  from  approximately
$2,479,000 in the comparable 2004 period. Expressed as a percentage of revenues,
sales and  marketing  costs  increased  from 12% of  revenues in the three month
period  ended March 31, 2004 to 14% of revenues in the  comparable  2005 period.
General  and  administrative  expenses  were 8% of  revenues  in the three month
period  ended March 31, 2004 and 8% of revenues in the  comparable  2005 period.
The overall increase in expenses was primarily due to increased selling costs on
a  higher  revenue  base,  the  addition  of  sales  personnel,  management  and
administration  from the ITI and  Redrock  acquisitions,  and  additional  costs
incurred in the integration of those businesses in our Southwest region.


<PAGE>

Nine Months ending March 31, 2005 and 2004

Selling,   general  and  administrative   expenses  increased  to  approximately
$11,700,000  in  the  nine  months  ended  March  31,  2005  from  approximately
$8,232,000 in the comparable 2004 period. The increase in expenses was primarily
due to increased  selling  costs on a higher  revenue  base,  and an increase in
general and  administrative  expenses  incurred in connection with  acquisitions
completed  during the quarters  ended  December 31, 2004 and September 30, 2004.
Expressed as a percentage of net revenues,  selling,  general and administrative
expenses were 21% as compared to 24% in the comparable 2004 period. The decrease
was primarily related to additional selling, general and administrative expenses
on a higher revenue base during the nine month period ending March 31, 2005.

 Net Income

Three Months ending March 31, 2005 and 2004

Our net loss for the three months ended March 31, 2005 was  $3,697,000  compared
to a net loss of $1,077,000  for the quarter ended March 31, 2004.  The net loss
in the March 31,  2005  period  includes  approximately  $2,292,000  in non-cash
items,  including  depreciation and amortization of $732,000, a non-cash expense
for warrants of $51,000, write-downs of investments totaling $982,000, a loss on
extinguishment  of  debt  of  $336,000,  $134,000  of  deferred  financing  cost
amortization  and $57,000 of debt  discount.  The decrease in net margin is also
attributable  to the decrease in gross profit margin from product sales from 18%
in the three months ended March 31, 2004 to 13% in the  comparable  2005 period,
and an increase in selling,  general and administrative expenses as a percentage
of  revenues  from 20% in the three  months  ended  March 31, 2004 to 24% in the
comparable 2005 period.

Nine Months ending March 31, 2005 and 2004

Our net loss for the nine months ended March 31, 2005 was  $10,651,000  compared
to a net loss of  $8,184,000  for the nine months ended March 31, 2004.  The net
loss in the  nine  month  period  ended  March  31,  2005  includes  a  goodwill
impairment of  $6,026,000,  compared to a goodwill  impairment of $3,000,000 for
the  comparable  nine-month  period  in the prior  year.  Without  the  goodwill
write-down,  the net loss for the nine  months  ended  March 31, 2005 would have
been  $4,626,000,  compared to $5,184,000 for the comparable  nine-month  period
ended March 31, 2004.  Gross profit increased from $6,120,000 for the nine month
period ended March 31, 2004 to $10,049,000 for the nine-month period ended March
31,  2005.  The  Company  also had a gain  from  the  disposal  of  discontinued
operations of $1,593,000 during the nine month period ended March 31, 2005.

Discontinued Operations

Net loss from  discontinued  operations  was $83,000 for the three  months ended
March 31,  2005  compared to a net loss of $23,000  for the three  months  ended
March 31, 2004.  The increase is  attributable  to legal and  professional  fees
associated  with the processing of settlement  payments  during the three months
ended March 31, 2005.


<PAGE>

Liquidity and Capital Resources

We measure our  liquidity in a number of ways,  as  summarized  in the following
table:

<TABLE>
<CAPTION>
                                                                              (Dollars in thousands)
                                                                           As of                As of
                                                                       March 31, 2005       June 30, 2004
                                                                       --------------       -------------
<S>                                                                       <C>                  <C>
Cash and cash equivalents                                                 $ 1,245              $ 3,289
Working capital                                                           $(1,958)             $   281
Working capital without giving effect to acquisition liability            $ 2,292              $   281

Current ratio                                                              0.90:1               1.02:1
Current ratio without giving effect to acquisition liability               1.15:1               1.02:1
Notes payable (current portion)                                           $ 2,537              $ 1,812
</TABLE>

Cash and cash equivalents  generally  consist of cash and money market funds. We
consider all highly liquid investments purchased with maturities of three months
or less to be cash  equivalents.  Such  investments  are  stated at cost,  which
approximates  fair value,  and are considered  cash  equivalents for purposes of
reporting cash flows.

During the nine  months  ended  March 31,  2005,  we used cash of  approximately
$5,094,000 in operating activities and $1,871,000 in discontinued operations.

As described in Note 13 to the Condensed Consolidated  Financial Statements,  in
October 2004, we paid to the former  shareholders of Redrock  Communications  as
part of the purchase  price for our  acquisition  of Redrock  Communications  an
initial cash payment of $2,500,000. In addition, we paid a deferred cash payment
of $500,000  sixty (60) days after the closing date of the  transaction,  and we
are obligated to pay an earn-out cash payment of $1,500,000 by July 30, 2005.

As described in Note 13 to the Condensed Consolidated  Financial Statements,  as
part of the purchase price in our acquisition of Integration Technologies, Inc.,
we paid an initial cash payment of $2,500,000.  In addition, we are obligated to
pay an earn-out cash payment of $2,250,000 by July 30, 2005.

We had a working  capital  deficiency  of  $1,958,000 as of March 31, 2005. As a
result of the foregoing, our cash decreased by $1,982,000.

On February 10, 2005, the Company entered into a Securities  Purchase  Agreement
with certain  institutional  and accredited  investors (the "Investors") for the
sale of $7,700,000, approximately $6,884,000 net of expenses, of Common Stock of
the Company at a price of $0.52 per share. In connection with such purchase, the
Investors  received  warrants to purchase an aggregate  of  3,701,919  shares of
Common Stock for an exercise  price of $0.66 per share,  and cannot be exercised
for a period of six months from issuance.

On July 31,  2004,  our  credit  facility  agreement  with an agency of  Textron
Financial Corporation ("Textron") was amended and extended for 24 months through
June 30, 2006. The amended Textron facility provides us with a full notification
factoring  facility for up to $7,000,000 of working capital.  Eligible  accounts
receivable  expected to be collected within 90 days are purchased with recourse,
less a holdback amount of 15%. Interest is charged on the outstanding balance at
the Prime rate plus 2.0% (7.75% at March 31, 2005). Additionally, a

<PAGE>

0.15% discount fee is charged at the time of purchase,  proceeds received by the
Company under the Textron  facility are treated as  borrowings.  As of March 31,
2005, the outstanding balance under such credit facility amounted to $3,651,000.

We may  expand the scope of our  product  and  services  offerings  by  pursuing
acquisition  candidates with complementary  technologies,  services or products.
Should we  commence  such  acquisitions,  we believe  that we would  finance the
transactions  with a  combination  of our working  capital  and the  issuance of
additional  securities.  We may attempt to secure additional funding,  including
equity or debt financing where  appropriate,  for acquisitions.  There can be no
assurance,  however,  that we  will be  successful  in  identifying  appropriate
acquisition candidates or that, if appropriate  candidates are identified,  that
we will be  successful  in  obtaining  the  necessary  financing to complete the
acquisitions

In the event of any  additional  financing,  any equity  financing  would likely
result in dilution  to our  existing  stockholders  and any debt  financing  may
include restrictive covenants.  Should we require additional working capital, we
would consider  divesting  certain of our contracts or other assets that may not
be critical to the business.

Contractual Obligations

<TABLE>
<CAPTION>
                                                                    Payments due by period
                                                                       (in thousands)
                                                               Less                                     More
                                                              than 1          1-3            3-5       than 5
                                                Total          year          years          years      years
<S>                                           <C>            <C>            <C>            <C>
            Contractual Obligations
            Convertible Debt Obligations       10,189          2,537          7,652             --        --
            Operating Lease Obligations         2,642          1,005            990            647        --
                                              -------        -------        -------        -------      ----
            Total                             $12,831        $ 3,542        $ 8,642        $   647        --
                                              =======        =======        =======        =======      ====
</TABLE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      The Company's financial  statements and accompanying notes are prepared in
accordance with accounting  principles  generally accepted in the United States.
Preparing  financial  statements  requires  management  to  make  estimates  and
assumptions  that affect the reported amounts of assets,  liabilities,  revenue,
and expenses.  These  estimates  and  assumptions  are affected by  management's
application of accounting policies.  Critical accounting policies for us include
revenue  recognition,  impairment of goodwill,  and accounting for  discontinued
operations.

Revenue Recognition. We apply the revenue recognition principles set forth under
SOP 97-2 and SAB 104 with respect to all of our revenue.  We adhere  strictly to
the  criteria  set forth in  paragraph  .08 of SOP 97-2 and  outlined in SAB 104
which provides for revenue to be recognized  when (i) persuasive  evidence of an
arrangement exists, (ii) delivery has occurred,  (iii) the vendor's fee is fixed
or determinable, and (iv) collectability is probable.

A summary of our revenue  recognition  policies,  as they relate to our specific
revenue streams, is as follows:

Computer Hardware Product Revenues

We require our hardware  product sales to be supported by a written  contract or
other evidence of a sale transaction that clearly indicates the selling price to
the  customer,  shipping  terms,  payment  terms  (generally 30 days) and refund
policy, if any.

Since our  hardware  sales are  supported by a contract or other  document  that
clearly  indicates the terms of the transaction,  and our selling price is fixed
at the time the sale is  consummated,  we record  revenue on these  sales at the
time in which we receive a confirmation that the goods

<PAGE>

were  tendered at their  destination  when  shipped "FOB  destination,"  or upon
confirmation that shipment has occurred when shipped "FOB shipping point."

Software Product Revenues

We make  substantially  all of our  software  product  sales  as a  reseller  of
licenses  which may include a post contract  customer  support  arrangement  and
access to product and upgrades and enhancements that are provided exclusively by
the  manufacturer  following  delivery  and  the  customer's  acceptance  of the
software  product.  We do not  presently  sell  any  software  that  we  develop
internally.  Any responsibility for technical support and access to upgrades and
enhancements  to these software  products are solely the  responsibility  of the
software  manufacturer,  which  arrangement is known to the customer at the time
the sale is consummated.  With respect to delivery, we require that the customer
has received  transfer of the software or, at a minimum,  an authorization  code
("key") to permit access to the product.  If a software  license is delivered to
the customer,  but the license term has not begun,  we do not record the revenue
prior to inception of the license term.

We require our software  product sales to be supported by a written  contract or
other evidence of a sale  transaction,  which  generally  consists of a customer
purchase  order  or  on-line  authorization.  These  forms of  evidence  clearly
indicate  the selling  price to the  customer,  shipping  terms,  payment  terms
(generally  30 days) and refund  policy,  if any.  The  selling  prices of these
products are fixed at the time the sale is consummated.

For product sales,  we apply the factors  discussed in EITF 99-19 in determining
whether to recognize  product revenues on a gross or net basis. In a substantial
majority of our  transactions,  we (i) act as principal;  (ii) take title to the
products; and (iii) have the risks and rewards of ownership,  including the risk
of loss  for  collection,  delivery  or  returns.  For  these  transactions,  we
recognize  revenues  based on the  gross  amounts  billed to our  customers.  In
certain  circumstances,  based on an  analysis  of the factors set forth in EITF
99-19,  we have  determined  that we were  acting  as an  agent,  and  therefore
recognize  revenues on a net basis.  For the nine months  ended March 31,  2005,
revenues  recognized on a net basis  totaled  approximately  $762,000,  or 2% of
total product revenues during the period.

Technical Services Revenue

We generally bill our customers for  professional  IT services based on hours of
time that we spend on any given  assignment at our hourly billing  rates.  As it
relates  to  delivery  of these  services,  we  recognize  revenue  under  these
arrangements  as the work is  completed  and the customer  has  indicated  their
acceptance  of our  services by approving a work order  milestone or  completion
order. For certain engagements,  we enter fixed bid contracts,  and we recognize
revenue as phases of the project are completed  and accepted by our client.  For
our seat management  services,  we enter unit-price  contracts (e.g.,  price per
user for seat  management),  and we recognize  revenue  based on number of units
multiplied by the agreed-upon contract unit price per month.

BPO  Services Revenue

For our business process outsourcing  ("BPO") services,  which primarily include
our child support service  contracts in the states of Kansas,  and Nebraska,  we
provide services under a fixed price (flat monthly fee) contract,  and recognize
revenue as the services are provided and billed. In the state of North Carolina,
we have one  contract  subject  to  revenue-sharing  related  to  child  support
services.  Under that  contract a fee from amounts  collected is shared with the
county on a percentage basis, and revenue is recognized  monthly in arrears as a
percentage of the total amount of collections received.

Collectibility of Receivables.  A considerable amount of judgment is required to
assess  the  ultimate  realization  of  receivables,   including  assessing  the
probability  of  collection  and the current  credit  worthiness of our clients.
Probability of collection is based upon the assessment


<PAGE>

of the client's financial  condition through the review of its current financial
statements or credit reports.

Goodwill. SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill
be tested for impairment at the reporting unit level  (operating  segment or one
level below an operating segment) on an annual basis (June 30th for the Company)
and between annual tests in certain  circumstances.  Application of the goodwill
impairment test requires  judgment,  including the  identification  of reporting
units,  assigning assets and liabilities to reporting units,  assigning goodwill
to  reporting  units,  and  determining  the fair value.  Significant  judgments
required to estimate the fair value of reporting units include estimating future
cash  flows,  determining  appropriate  discount  rates and  other  assumptions.
Changes  in  these  estimates  and  assumptions   could  materially  affect  the
determination of fair value and/or goodwill  impairment for each reporting unit.
We have recorded  goodwill in connection with the Company's  acquisitions,  most
recently  the  acquisitions  of Redrock  Communications  in  September  2004 and
Integration  Technologies,  Inc. in October 2004,  and recorded  goodwill in the
amount of $4,455,000 and $4,393,000,  respectively. In these instances, goodwill
was  determined by comparing the purchase  price and related  transaction  costs
with the fair value of the net tangible assets and liabilities  acquired, as set
forth in Note 14.

Basis of  Presentation.  During the fiscal year ended June 30, 2003, the Company
adopted a plan to sell our transportation  brokerage  operations in the state of
Virginia.  The operations are accounted for as a  discontinued  operation,  and,
accordingly,  amounts in the consolidated financial statements and related notes
for all periods presented reflect discontinued operation accounting.

Recent Accounting Pronouncements

In January 2003,  Financial  Accounting  Standards  Board  ("FASB")  issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This  interpretation  of  Accounting  Research  Bulletin  No. 51,  "Consolidated
Financial  Statements," provides guidance for identifying a controlling interest
in a variable  interest  entity  ("VIE")  established by means other than voting
interest.  FIN 46 also required  consolidation  of a VIE by an  enterprise  that
holds such  controlling  interest.  In December  2003,  the FASB  completed  its
deliberations  regarding  the  proposed  modifications  to  FIN  46  and  issued
Interpretation  Number 46R,  "Consolidation  of Variable  Interest Entities - an
Interpretation  of ARB 51"  ("FIN  46 R").  The  decisions  reached  included  a
deferral of the effective date and provisions  for additional  scope  exceptions
for certain types of variable interests.  Application of FIN No. 46R is required
in  financial  statements  of public  entities  that have  interests  in VIEs or
potential  VIEs  commonly  referred to as  special-purpose  entities for periods
ending after December 15, 2003.  Application  by public small business  issuers'
entities is required in all interim and annual financial  statements for periods
ending  after  December  15, 2004.  The  adoption of this  pronouncement  is not
expected to have material effect on the Company's financial statements.

In December 2004,  the FASB issued  Statement of Financial  Accounting  Standard
("SFAS") No. 123R "Share Based  Payment".  This  statement is a revision of SFAS
Statement No. 123, "Accounting for Stock-Based  Compensation" and supersedes APB
Opinion  No. 25,  Accounting  for Stock  Issued to  Employees,  and its  related
implementation  guidance.  SFAS 123R  addresses all forms of share based payment
("SBP") awards  including  shares issued under  employee  stock purchase  plans,
stock options,  restricted stock and stock appreciation rights. Under SFAS 123R,
SBP awards  result in a cost that will be  measured at fair value on the awards'
grant date,  based on the  estimated  number of awards that are expected to vest
that will result in a charge to  operations.  This  statement is  effective  for
public entities that do not file as small business  issuers--as of the beginning
of the first interim or annual reporting period that begins after June 15, 2005.
The  Company is  currently  in the  process of  evaluating  the effect  that the
adoption of this pronouncement may have on its financial statements.

In December 2004,  the FASB issued  Statement of Financial  Accounting  Standard
("SFAS") no. 153  "Exchanges  of  Nonmonetary  Assets".  This  Statement  amends
Opinion 29 to eliminate the


<PAGE>

exception for nonmonetary exchanges of similar productive assets and replaces it
with a general  exception for exchanges of  nonmonetary  assets that do not have
commercial  substance.  A nonmonetary  exchange has commercial  substance if the
future cash flows of the entity are expected to change significantly as a result
of the  exchange.  The  provisions  of this  Statement,  which is to be  applied
prospectively are effective for nonmonetary asset exchanges  occurring in fiscal
periods  beginning  after June 15, 2005.  Earlier  application  is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2004. The adoption of this pronouncement is not expected to have material effect
on the Company's financial statements.

EITF Issue 04-8, "The Effect of Contingently  Convertible Instruments on Diluted
Earnings per Share." The EITF reached a consensus that contingently  convertible
instruments,  such as contingently  convertible debt,  contingently  convertible
preferred  stock,  and other  such  securities  should be  included  in  diluted
earnings per share (if dilutive)  regardless of whether the market price trigger
has been met. The  consensus is effective  for  reporting  periods  ending after
December 15, 2004.  The adoption of this  pronouncement  is not expected to have
material effect on the Company's financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk associated  with adverse  changes in financial and commodity  market
prices and rates could impact our financial position,  operating results or cash
flows.  We are exposed to market  risk due to changes in interest  rates such as
the prime  rate and  LIBOR.  This  exposure  is  directly  related to our normal
operating  and funding  activities.  Historically,  and as of March 31, 2005, we
have not used derivative instruments or engaged in hedging activities.

The Textron credit facility  exposes the Company to the risk of earnings or cash
flow loss due to changes in market interest  rates.  The Textron credit facility
requires  interest  to be paid at 2.0% over the prime  rate.  The  Laurus  Funds
convertible  secured  term note  exposes  the Company to similar  risks,  and it
requires interest to be paid at 1% over the prime rate. The table below provides
information on the Textron credit facility, the Senior Subordinated  Convertible
Notes and the Laurus Funds Note as of March 31, 2005.

--------------------------------------------------------------------------------
                                                                Weighted Average
                                           Principal Balance     Interest Rate
--------------------------------------------------------------------------------
  Factoring credit facility                   $3,651,000              6.75%
--------------------------------------------------------------------------------
  Senior Subordinated Convertible Notes       $3,937,775              9.0%
--------------------------------------------------------------------------------
  Secured Convertible Laurus Note             $6,649,999              5.75%
--------------------------------------------------------------------------------

ITEM 4. CONTROLS AND PROCEDURES

An evaluation as of the end of the period covered by this  quarterly  report was
performed  under the  supervision  and with the  participation  of the Company's
management,  including its Chief Executive Officer and Chief Financial  Officer,
regarding  the  effectiveness  of the  design  and  operation  of the  Company's
disclosure  controls and  procedures.  Based on that  evaluation,  the Company's
Chief  Executive  Officer and Chief Financial  Officer,  have concluded that the
Company's  disclosure  controls and  procedures are effective to ensure that the
information  required to be disclosed in the Company filings or which it submits
under  the  Securities  Exchange  Act is  recorded,  processed,  summarized  and
reported  within the time  periods  specified  in the  Securities  and  Exchange
Commission's  rules and  forms.  There  have been no  changes  in the  Company's
internal controls over financial reporting that occurred during the three months
ended March 31, 2005 that have materially affected,  or are reasonably likely to
materially affect, the Company's internal control over financial reporting.


<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

                            COMMONWEALTH OF VIRGINIA

 Effective  December 15,  2002,  the Company  entered  into a mutual  Settlement
Agreement (the "Settlement Agreement") to cancel a contract (the "Transportation
Contract") in which it provided non-emergency  transportation brokerage services
through third party providers (the "Transportation Vendors") to the Commonwealth
of Virginia ("Virginia"). Pursuant to the terms of the Settlement Agreement, the
Company agreed to make certain payments due to the Transportation  Vendors under
an agreed-upon  schedule through June 2003. At the time the Company entered into
the Transportation Contract,  DynCorp, Inc. ("Dyncorp") posted a $2,400,000 bond
(the "Bond") to guarantee its financial  performance under the contract in favor
of  Virginia.  Dyncorp also  indemnified  the Company for any  potential  losses
(obligations) in excess of $2,400,000 (the "Bonded  Amount").  Certain claims of
the Transportation Vendors caused the Bond to be called, initiating a process of
disbursing the Bonded Amount to Transportation  Vendors with verifiable  claims.
The bonding company filed an interpleader action (the "Interpleader  Matter") to
distribute  the Bonded  Amount on July 22,  2003.  In addition to making  claims
against the Bond in the Interpleader Matter, many of the Transportation  Vendors
initiated  separate  claims for payment  against the Company both as part of and
separate  from the  Interpleader  Matter.  The Company  provided  DynCorp with a
limited  release of its indemnity  for aggregate  claims in excess of the Bonded
Amount.  Accordingly,  the Company  assumed the  liability  for valid  claims in
excess of the Bonded Amount.

The  Company   entered  into   settlement   agreements  with  a  number  of  the
Transportation  Vendors  and, on December  1, 2004,  the Court  entered an Order
granting  the  Company's   Motion  to  Approve   Settlements  and  to  Authorize
Disbursement of  Interpleader  Funds (the "Order").  Pursuant to the Order,  the
Bonded  Amount  was  transferred  to the  Transportation  Vendors  by  DynTek in
accordance with the terms of various settlement agreements.

All claims in the  Interpleader  Matter  against  the Bond  and/or  against  the
Company,  except for two have been  settled and paid as of March 31,  2005.  All
Transportation  Vendors holding settled and paid claims have been dismissed from
the Interpleader Matter and pending state court lawsuits, if any, have also been
dismissed.  Of the two remaining unpaid claims,  one is settled and will be paid
in full by June 1, 2005 and will be dismissed  from the  Interpleader  Matter at
that time.

The Company is still in negotiations  and is proceeding with litigation with one
remaining  Transportation  Vendor  which  has  not  entered  into  a  settlement
agreement  with the  Company.  A portion of the  Bonded  Amount is being held in
escrow for this Transportation Vendor, if necessary.

The Company  records  provisions  for the estimated  amount of any settlement or
judgment in excess of amount covered by the portion of the Bonded Amount that is
held in escrow.  The Company  believes that its  provisions are adequate but, is
unable to predict the outcome of the remaining unsettled claim.


<PAGE>

ITEM 6. EXHIBITS

(a) Exhibits.

      31.1  Certification of Chief Executive  Officer Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.

      31.2  Certification of Chief Financial  Officer Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.

      32.1  Certification of Chief Executive  Officer Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.

      32.2  Certification of Chief Financial  Officer Pursuant to Section 302 of
      the Sarbanes- Oxley Act of 2002.


<PAGE>

SIGNATURE

      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

DYNTEK, INC.

                                           By: /s/ Steven J. Ross
                                               ---------------------------------
                                           Steven J. Ross
                                           President and Chief Executive Officer

                                           Date: May 16, 2005